Unfair Contract Terms

If it finds them to be “unfair”, a Court or Tribunal can invalidate contract provisions (“terms”) in “standard form contracts” which are entered into, renewed or varied on or after 12 November 2016 if:

  • the contract is for the supply of goods or services or the sale or grant of an interest in land (such as the sale or leasing of land);
  • at least one of the parties is a small business (employs less than 20 people, including casual employees employed on a regular and systematic basis); and
  • the “upfront price” payable under the contract is no more than $300,000 or $1 million if the contract is for more than 12 months.

Contracts Affected

A contract is a “standard form contract” if it has been prepared by one party to the contract and the other party has had little or no opportunity to negotiate the terms, i.e. the offer is made on a “take it or leave it” basis.  Relevant considerations include following:

 

  • whether one of the parties has all or most of the bargaining power relating to the transaction;

  • whether the contract was prepared by one party before any discussion relating to the transaction occurred between the parties;

  • whether another party was, in effect, required either to accept or reject the terms of the contract (other than the terms referred to in section 26(1)) in the form in which they were presented;

  • whether another party was given an effective opportunity to negotiate the terms of the contract that were not the terms referred to in section 26(1);

  • whether the terms of the contract (other than the terms referred to in section 26(1)) take into account the specific characteristics of another party or the particular transaction.

However, the following contracts are not covered by the unfair contract terms legislation:  Shipping contracts; Constitutions of companies, managed investment schemes or other kinds of bodies; and Certain insurance contracts (e.g. car insurance).

What is an unfair term?

The unfair contracts legislation relevantly provides that a term of a small business contract is “unfair” if:

 

  • it would cause a significant imbalance of the parties’ rights and obligations arising under the contract;

  • it is not reasonably necessary in order to protect the legitimate interests of the party who would be advantaged by the term; and

  • it would cause detriment (whether financial or otherwise) to a party if it were applied or relied on.

 

In determining whether a term of a contract is unfair the Court must take into account the extent to which the term is “transparent” (expressed in reasonably plain language, legible, presented clearly and readily available to any party affected by the term).

Examples of “unfair terms” include:

  • terms that enable one party (but not another) to avoid or limit their obligations under the contract

  • terms that enable one party (but not another) to terminate the contract

  • terms that penalise one party (but not another) for breaching or terminating the contract

  • terms that enable one party (but not another) to vary the terms of the contract.

 

Further examples can be found here.

The following types of provisions are excluded from the operation of the unfair contracts legislation:

  • terms that define the main subject matter of the contract (i.e. the goods or services being sold)

  • terms that set the upfront price payable

  • terms that are required or expressly permitted by a law of the Commonwealth, or a state or a territory (e.g. permitted under the Franchising Code or another prescribed industry code).

 

ACCC  v  Servcorp

The recent case of Australian Competition and Consumer Commission v Servcorp Limited [2018] FCA 1044 is an interesting example of how the Courts apply the unfair contract terms legislation.  An article on the case can be found here.

 

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Contact us if we can be of assistance in relation to the unfair contract terms legislation. 

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